A Roadmap for States to Protect Borrowers

By Rebecca Maurer | May 21, 2020

Faced with a federal government that has failed to adequately respond to the coronavirus pandemic, state governments have taken unprecedented steps to protect their citizens at every stage of the current crisis. Indeed, the actions states have taken go far beyond public health and safety. These state actions extend into consumer financial protection.

The prominence of state action on behalf of consumers raises an important and timely question: What tools can states leverage to respond to the needs of their residents who must now deal with the economic fallout from coronavirus.  

Today, the Student Borrower Protection Center released new research developed as part of its Student Loan Justice Fellowship Program to help answer this question. The report, written by SBPC fellow Brian Shearer, builds a case for how states can oversee the nonbank companies at the center of the $1.6 trillion student loan market. The report also offers a path forward for states to oversee other critical nonbank financial institutions that play large roles in our consumer financial markets.

Read the Full Report: Federalism to the Rescue: State Regulators Can and Should Examine for Violations of Federal Consumer Financial Law

Putting States’ Police Powers in Context

It is perhaps unsurprising that during a pandemic, our national attention has turned to historical examples of widespread illness, from the 1918 influenza to the bubonic plague. But what has been surprising is the rise of gallows humor stemming from references to the 1777 Articles of Confederation—the original agreement between the 13 colonies which prized the independence and sovereignty of the colonies over the power of a central federal government.

The Articles of Confederation is an unexpected historical touchstone in this moment, a touchstone that has arisen not out of the cyclical nature of the once-in-a-century pandemic, but out of the politically fueled crisis where states have been forced to step into the vacuum left by a faltering federal government. States are now being asked to do everything from securing their own testing supply and using their national guard troops to keep them safe to chartering jets to shepherd needed masks within state borders.

Of course, many burdens beyond only healthcare are being placed on the shoulders of state leadership in the middle of the pandemic. As the crisis rapidly expands from a healthcare crisis to also a financial catastrophe, one of those critical areas is consumer financial protection.

The federal approach to consumer financial protection should, of course, entail the Consumer Financial Protection Bureau (CFPB)—an institution born of the last financial crisis and designed to protect consumers across all 50 states and U.S. territories.

But, instead of leading the charge, the CFPB has faltered, choosing in each instance to lessen oversight on regulated entities and turn its back on consumers. And as we are seeing in so many other sectors, it is states that are stepping into that void. For instance, Massachusetts is using its state powers to limit debt collection for the remainder of the pandemic. Wisconsin’s Department of Financial institutions issued emergency guidelines preventing debt holders and payday lenders from gouging residents in response to coronavirus. States all over the country have issued a patchwork of moratoriums limiting the ability for private debt collectors to get hearings while states of emergency are in place. In this shifting landscape where state leadership is becoming more critical, the question naturally arises: What else can and should states be doing to protect their residents?

A Roadmap for State Action to Protect Consumers

Today’s new report answers that question, making clear that states—and in particular, state banking regulators—have the ability under Section 1042 of the Dodd-Frank Act to take a much more expansive role in overseeing violations of federal consumer protection laws, allowing them to better protect their struggling citizens from ongoing and future financial harm.

Shearer’s research makes clear the importance of state action in the context of the student loan market—and specifically the emergent need to fight back against Betsy Devos’s obstruction tactics. However, the report’s analysis also offers an instructive model for state consumer protection in other markets. Every day the public hears about abuses that are going unaddressed, from mortgage services imposing improper balloon payments on borrowers, to creditors causing a dramatic spike in credit reporting problems, to debt collectors using predatory tactics to prey on borrowers. This paper shows a path forward for states to respond to these challenges faced by their residents. The paper sets out the critical need for this state-level approach as borrowers face down the financial upheaval of the coronavirus pandemic coupled with financial institutions that seem keen to take advantage of the crisis.

All over the country, we are watching governors and state legislatures step in where the federal government is failing. The use of state powers to address consumer finance abuses is no different. Indeed, this is the time where all authorities and approaches must be used. This new research offers a guide for what states should, and must, be doing to protect their residents from unscrupulous servicing practices.

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Rebecca Maurer works at the Student Borrower Protection Center and is Counsel and Program Manager for the Student Loan Law Initiative.